Do-it-yourself landlords meet reality

Investing in real estate has long been seen as a great way to make money, but being a landlord is not as simple as it appears.

Clearly, there is an appeal in buying properties and renting them out to people who can’t afford to buy their own home, covering the purchase cost through the rent payments and hopefully seeing an increase in home value along the way.

But the proposition isn’t as clear-cut as it seems.

“John and Jane Doe will become landlords thinking, ‘We’re going to make money and retire rich,’ but the reality is not all tenants pay rent on time and some will trash the property,” said Joe Rempson, vice president with T.R. Lawing Realty Inc., a Charlotte property management company.

Common mistakes

Margins are pretty thin for a landlord, accounting for mortgage payments, property insurance, taxes and property maintenance, factors that many small investors do not take into account. And the prospect of additional expense is one reason they don’t hire a property manager to begin with, even though doing so could help offset some risk. Some landlords will also cut corners by doing the maintenance themselves rather than retaining handymen or professionals like plumbers and electricians.

“They’ll say, ‘I lived with a leaky toilet for years,’ and not fix small problems,” said Rempson.

Another area where small landlords have trouble is properly valuing the rents on the properties they’re letting, said Phil Henderson, president of Henderson Properties.

“Typically, they’ll undervalue the rent because they don’t have access to the multiple listing service and can’t run comps,” he said.

Often, the homeowners haven’t collected security deposits or social security numbers from their tenants, or done proper background checks, thinking that the tenants seem nice.

“Everybody wants to believe in people, which is why mom and pop landlords get taken advantage of,” said Leigh Wall, a third-generation Realtor with Berryhill Realty Co.

“They’ll come to us after tenants haven’t paid rent in two years, asking for help,” said Wall.

And some habitual offenders know how to game the system, and rookie landlords can run into trouble because they’re unfamiliar with local, state and federal landlord tenant laws.

Rempson, who handled the eviction process for his company for 12 years, remembers one day seeing a former tenant who had gotten evicted three months earlier from a property he managed back in court.

“She knew the eviction system inside and out,” he said.

Her more recent landlord was asking to evict the woman because she had a dog on the property, contrary to the rental agreement, and not on the grounds that she was again not paying rent. The landlord lost the case. Rempson caught up with the homeowner later and told him he should have pressed the case on the nonpayment of rent, not on the dog.

“They’re unaware of their rights or how to go about giving notice of eviction or navigating court paperwork or knowledge that they’re required to install carbon monoxide detectors in homes,” said Henderson.

“On the surface, it sounds simple enough, but there’s more to being a landlord, but people don’t realize it until they get into it,” Henderson said.

Calling the pros

That’s when mom and pop landlords will call in the cavalry: the professional property managers.

Sometimes landlords will ultimately turn to property managers simply because they just get tired of the “midnight calls” to fix problems, according to Rempson.

But Rempson said that if a landlord already has a property tenant who hasn’t been paying rent for a few months, there’s very little a property manager can do to help at that point.

“I usually give them some attorneys to contact,” Rempson said.

Henderson said potential problems need to be considered on the front end.

“We’ve taken over a large number of properties from investors who’ve either gotten burned or frustrated,” said Henderson, who said he’s also heard hundreds of horror stories from these owners. Henderson said the biggest shortcoming in small landlords is either their inability or unwillingness to properly screen applicants.

North Carolina is a fairly landlord-friendly state, according to Rempson, and bad tenants who don’t pay can be evicted for nonpayment of rent, though the process can take 60 days and requires filing actions in court – a three-month period in which a landlord continues to not receive rent payments.

Rempson and Henderson both said their companies thoroughly vet prospective tenants, running criminal searches and employment verifications to make sure they meet income qualifications and to mitigate some of the risk.

For a few dollars a month, a landlord who hires a property management company will not only assume a less risky tenant, they’ll get a team that looks after the property, collects rents, maintains homes, does a vacancy inspection to ensure properties are left in good order and handles the paperwork associated with being a landlord.

Despite background checks, Rempson said his company still encounters a few bad apples, but with a portfolio of 2,750 properties under management, the company’s eviction rate is low, at three to five a month.